The securities commissions in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (“Participating Jurisdictions”) are amending National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) in respect of the offering memorandum exemption in section 2.9 of NI 45-106 in those jurisdictions (“New OM Exemption”).
The new rules will come into force in Ontario on January 13, 2016 and in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan on April 30, 2016. No changes are being made to the current OM exemption currently in place in Manitoba, Prince Edward Island, British Columbia and the territories. This will result in two different forms of the OM exemption in place across Canada with different phase in periods for the New OM Exemption in Ontario (January 16th, 2016) and in the other Participating Jurisdictions (April 30, 2016).
There is currently an OM exemption in two forms in place in all provinces and territories in Canada except Ontario– the “BC Model” in place in British Columbia, New Brunswick, Nova Scotia and Newfoundland and the “Alberta Model” in place in Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Québec, Saskatchewan and the Yukon. The BC Model has no restriction on purchaser or investment size. Under the Alberta Model, the purchaser must be an “eligible investor” or acquisition cost must not be more than $10,000. The Alberta model also has limited application to investment funds.
After the New OM Exemption is introduced, the BC Model will be in effect in BC and Newfoundland the Alberta Model will be in effect in the Northwest Territories, the Yukon, Nunavut, Prince Edward Island and Manitoba.
Under all of the offering memorandum exemptions, issuers who produce a prescribed disclosure document are able to sell securities to investors as long as the disclosure document is up to date and the financial statements are not stale.
The New OM Exemption will contain a number of changes from the BC and Alberta Models exemption which are features designed to enhance investor protection. These include:
1. requiring that non-reporting issuers provide to investors:
- audited annual financial statements
- an annual notice on how the proceeds raised under the OM exemption have been used, and
- in New Brunswick, Nova Scotia and Ontario, notice in the event of a discontinuation of the issuer’s business, a change in the issuer’s industry or a change of control of the issuer,
2. requiring that marketing materials be incorporated by reference into the offering memorandum to provide investors with the same rights of action in respect of all disclosure made under the OM exemption in the event of a misrepresentation, and
3. imposing additional investment limits in respect of both eligible (i.e., investors who meet certain income or asset thresholds) and non-eligible investors that are individuals to limit the risks associated with an investment in securities acquired under the OM exemption.
The following is a summary of the new key features of the New OM Exemption adopted by the Participating Jurisdictions.
Issuer qualifications – available to both reporting and non-reporting issuers, but not available to investment funds in New Brunswick, Quebec and Ontario. There are no industry or other restrictions.
Types of securities – not available for distributions of specified derivatives and structured finance products. Issuers will be prohibited from relying on the New OM Exemption to distribute specified derivatives or structured finance products. In Alberta, Nova Scotia and Saskatchewan, the New OM Exemption will continue to be available to investment funds only if they are non-redeemable investment funds or mutual funds that are reporting issuers. In New Brunswick, Ontario and Québec, the New OM Exemption will not be available to investment funds.
Offering parameters – there is no limit on the size or the number of offerings and there is no restriction on the length of time the offering can remain open (subject to the OM being up to date and the financial statements not stale).
Registrant Involvement – no prohibition on using registrants that are related to an issuer.
Investment limits – there will be investment limits for both eligible and non-eligible investors that are individuals (other than those that qualify as accredited investors or under the family, friends and business associates exemption).
Eligible investors are individuals with net assets alone or with a spouse in the case of an individual which exceeds $400,000 or whose net income before taxes exceeded $75,000 alone or $125,000 with a spouse in two of the most recent calendar years and reasonable expects to exceed that level in the current year.
These limits will not apply to non-individual investors, whether eligible or non-eligible. There is a higher investment threshold for eligible investors when a portfolio manager, investment dealer or exempt market dealer has made a positive suitability assessment. The investment limits will apply to all securities acquired under the New OM Exemption as follows:
· in the case of a non-eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the New OM Exemption in the preceding 12 months cannot exceed $10,000,
· in the case of an eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the New OM Exemption in the preceding 12 months cannot exceed $30,000, and
· in the case of an eligible investor that is an individual and that receives advice from a portfolio manager, investment dealer or exempt market dealer that the investment above $30,000 is suitable, the acquisition cost of all securities acquired by the purchaser under the New OM Exemption in the preceding 12 months cannot exceed $100,000.
New schedules to the risk acknowledgement form – the Participating Jurisdictions will continue to require all investors (including those who qualify as permitted clients) to complete and sign form 45-106F4 Risk Acknowledgement, which highlights for investors the key risks associated with investing in securities acquired under the New OM Exemption.
However, two new schedules have been added which must be completed by each investor that is an individual in conjunction with the risk acknowledgement form. One schedule asks investors to confirm their status, as an eligible investor, non-eligible investor, accredited investor or an investor who would qualify to purchase securities under the family, friends and business associates exemption. The other schedule requires confirmation that the investor is within the investment limits, where applicable. Investors that are not individuals do not have to complete these new schedules.
Disclosure of audited annual financial statements, notice of use of proceeds and notice of specified key events – non-reporting issuers that use the OM exemption will be required to provide audited annual financial statements to investors, as well as a notice that accompanies the financial statements which describes how the money raised under the OM exemption has been used. A new prescribed form has been introduced for the purposes of this disclosure.
In New Brunswick, Nova Scotia and Ontario, non-reporting issuers will also be required to provide notice to investors of the following events, within 10 days of the event occurring, in a new prescribed form (Form 45-106F17):
· a discontinuation of the issuer’s business,
· a change in the issuer’s industry, or
· a change of control of the issuer.
Marketing and advertising – there is no restriction on advertising, marketing materials used by issuers in distributions under the New OM exemption must be incorporated by reference into the OM. As a result, the marketing materials will be subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation.
For more information on the New OM Exemption as well as the BC and Alberta Models please contact Barbara Hendrickson at 647.403.4606.